Dilma faces mounting difficulties

The administration of President Dilma Rousseff and the ruling Partido dos Trabalhadores (PT) have been put on the defensive following a new corruption scandal as well as recent fall-out from the largest corruption trial in Brazilian history, known as the mensalão ("big monthly stipend"), in which several PT officials have been sentenced to prison by the Supreme Court. Moreover, Brazil's economy is struggling to recover from a slowdown that began in 2011, despite the government's stimulus measures. Even though unemployment is at historically low levels, these developments threaten to erode Ms Rousseff's popularity and complicate the political scene in 2013.

Political rivals from allied parties and the opposition also have begun to stir. In addition, the president faces a mobilisation of political forces in Congress which are opposed to her recent veto of parts of a controversial oil royalties bill. All this points to a more fluid political environment than previously expected in 2013, when Ms Rousseff will be preparing the ground for a re-election bid at the October 2014 elections.

Yet another scandal

In the latest corruption case, a federal police investigation code-named Porto Seguro has led to arrests and the indictment of several government officials, including the head of the president's office in the state of São Paulo, Rosemary Nóvoa de Noronha; the deputy attorney-general, José Weber Holanda; and brothers Paulo Vieira and Rubens Vieira , who were political appointees at Brazil's water and aviation regulatory agencies, respectively.

The naming of the two brothers reflects a broader erosion of institutional capacity and independence at regulatory agencies after the previous president, Luiz Inácio Lula da Silva, padded them with political appointees. This has become more apparent in light of recent institutional failings, such as in the calculation of compensation for state electricity companies as part of a deal on contract renewals. Mr Vieira's appointment to the Agência Nactional das Aguas (ANA, the national water agency) had been rejected once by the Senate in 2009, although it was confirmed a year later. Ms Noronha, who is very close to Lula, is being investigated for corruption, including in the awarding of a licence for a huge terminal in the port of Santos (Mr Vieira was also one of the board members of Codesp, the port management company).

Ms Rousseff swiftly removed the officials from their posts while the police investigations continue their course, but the latest case is more damaging than those involving six ministers whom she fired last year as corruption allegations emerged in their respective portfolios.

Another problem has arisen because Marcos Valerio Fernandes de Souza, who received a prison sentence of over 40 years in the mensalão trial for being the main operator of the vote-buying scheme, has accused Lula of involvement in the affair. He also told the federal chief prosecutor that a PT official had vowed to kill him. Although Mr Fernandes did not present any evidence, the president of the Supremo Tribunal Federal (STF, the Supreme Court), Joaquim Barbosa, has said that the allegations (which implicate Lula for the first time) should be investigated. The opposition parties in Congress also want an investigation, seeing this as an opportunity to try to damage Lula's political standing, which has remained high since he left office at the end of 2011. Lula was unaffected by the mensalão case when it first erupted in 2005-06, thanks in part to his ability to convince the population that he knew nothing about it.

Government tries to limit the damage

The government has responded forcefully to the latest developments in an attempt to limit the damage. Regarding the arrests in the Porto Seguro investigation, the justice minister, Eduardo Cardozo, has said that there is no evidence of corruption at the heart of the government. Furthermoe, those who are suspected of wrongdoing have already been sacked. As for Mr Fernandes's allegations, these have been rejected by Lula, the PT and Ms Rousseff herself, who claim that they were a desperate move by a convicted individual who has no credibility. Yet even if Lula's role in the mensalão is not investigated further, Mr Fernandes's accusations have shaken the political environment. Lula and the PT (whom Mr Fernandes also accused of taking a cut from the vote-buying scheme) are considering holding political rallies next year across the country to try to clean up their tarnished image.

The spotlight on these scandals comes amid continued sluggishness in economic activity, despite a slew of stimulus measures, which risks making the Rousseff administration look ineffectual. Even if unemployment does not rise much, this could well lead to an erosion in her popularity, which up until recently has been very high. Because of the focus on the October municipal elections, polling agencies have not conducted public opinion surveys on the president's popularity since September. But the impact of her recent toils is likely to show up in the results of the next polls.

Political rivals stir ahead of the October 2014 elections

With 2013 approaching—and the October 2014 elections now looming larger on the horizon—the latest developments have raised the political temperature. Aécio Neves, who emerged recently as the likely presidential candidate of the opposition Partido da Social Democracia Brasileira (PSDB), and other opposition parties are calling for investigations into the recent corruption allegations.

Even a government ally, Eduardo Campos, the charismatic governor of the state of Pernambuco from the Partido Socialista Brasileiro (PSB), has begun to stir. He is putting pressure on the Rousseff government to show better "results" and is contributing to efforts in Congress to overturn the presidential veto of parts of the oil royalties bill. Outside the oil-producing states of Rio de Janeiro and Espírito Santo, her vetoes were deeply unpopular, as state government and municipalities seek to have more say over the distribution of oil royalties from development of Brazil's huge "pre-salt" reserves.

Mr Campos has clear presidential aspirations, and his manoeuvres could pressure the PT to choose him as Ms Rousseff's running mate in 2014 in order to clip his wings and assure a PT-led government in 2015-18. Mr Campos could well accept this if, in return, the PT would agree not to field a presidential candidate in 2018 and back him instead. Such manoeuvres would require careful handling of relations with the PT's main ally in the current government coalition, the Partido do Movimento Democrático Brasileiro (PMDB). The PMDB has signaled that while it will not field its own candidate for the presidency in 2014 it will do so in 2018. Against this political backdrop and disappointing economic performance of late, 2013 promises to be more uncertain than previously anticipated.